Saturday, 23 February 2013

Blue Chips = Buy and Hold Forever?

Blue chips are well-established companies with long track record of high revenue, solid earnings and usually with a good dividends. They are often the market leader in their industry, and are characterised by slower growth rate compared to growth companies, and have survived multiple bull-bear cycles.

Every portfolio should contain a few blue chip companies as they can function as the anchor to keep your portfolio stable and less volatile during market uncertainties. Couple that with stable dividends yield, they 'protect' your portfolio from too large a loss.

However, does it mean that blue chips, once bought, should be held on forever?

Certainly not. There are a few reasons to that.
Blue chips have reached a mature state of growth such that their growth rate, moving forward, will not increase forever. It will most likely maintain or plateau off. This means that the future price rise will be limited as well.

Blue chips are not immuned from market cycle too. Take a look at the GFC in 2008. Even the stalwarts in STI showed a fall of 40 - 50 percent from their peak. This shows that one cannot expect blue chips to hold their own during a market crash.

Perhaps the surest and safest way to invest in blue chips is to pick them up during market crash. And I mean big crash, similar to the one in 2008 GFC or the Euro Crisis in second half 2011. Enter, hold on to them and ride the way up, and unload them during toppish market, like now. This, in my opinion, is almost a fool-proof way of making decent profits.

I used to reject the idea of selling them at high price, thinking that blue chips are safe. Why should I sell it? Looking back, it does not really make sense. As blue chips are unlikely to go bust, I can always be patient and wait for them to fall before buying again. No point holding on and ride through the ups and downs as this greatly reduce the earnings. Look at Sembcorp, Capitaland, ST Engineering. They too, have rather pronounced price fluctuations over 1 full market cycle. I can just buy at crash, hold on for 3-4 years, sell, and re-enter after 1-2 years again. 

However, if your blue chips are for dividend income, I will suggest to not let go of them, as they provide one with cashflow through thick and thin. Buying strategy mentioned above applies, and the dividend yield will be attractive enough for one to keep them as your pillow stocks. When bear market comes, purchase more. Over long term one will reap handsome rewards through rich dividends.

Right now, I am patiently waiting to establish my positions in blue chips again. I am eyeing Sembcorp and Capitaland for market cycle strategy; and ST Engineering and Starhub for dividends. It will not be an easy wait, for it may be quite some time before market crash, and I have to be extremely patient and disciplined during the wait.

Meanwhile, just sit back and do nothing. Sometimes doing nothing beats doing everything in investing arena.

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